AM: Step back

By Jani Ziedins | Intraday Analysis

May 01
S&P500 daily at 1:25 EDT

S&P500 daily at 1:25 EDT

AM Update

MARKET BEHAVIOR
Buyers took a break after the 60-point rebound from the 50dma.  We are currently finding support above 1590 and so far the market is not signaling anything other than a normal pause after a strong run.  We traded within a range over the last two-months and are at the upper end.  Either we stay in the trading range, or breakout to the upside. The market could breakdown, but we need to retreat to the lower end of the range before that becomes a consideration.

MARKET SENTIMENT
Traders have been reluctant to buy highs and sell lows, leaving us range bound, albeit with an upward bias.  Stalling shy  of 1600 shows a continued reluctance to buy highs.  Of course there are two ways to look at this, one is reluctance, the other is inability.  Reluctance means there is still money ready to buy the dip, inability means bulls are out of money and there is nowhere to go but down.  So far every dip finding a bid signals reluctance, not inability, but bulls will eventually run out of money and that is what we are watching for.

We all know the market cannot go up every day, but it is tempting for a bear to label every dip the top.  That is letting our biases cloud our view of the market.  A five-point selloff is hardly anything to worry about and we need a lot more evidence before writing off this bull.

Many traders sold preemptively in anticipation of a summer pullback and are having second thoughts.  The inevitable selloff is not happening and many sellers are buying back in.  This is the floor under the market and why the Teflon rally keeps marching higher.

TRADING OPPORTUNITIES
Expected Outcome:
There is nothing in today’s modest pullback that should worry us.  We are still well above support at 1570 and even ten or fifteen points of selling won’t put the rally in jeopardy.  Two-steps forward, one back.  That is all this is unless we see something unusual.

Alternate Outcome:
This rally is long in the tooth and living on borrowed time.  We often see summer weakness and need to be alert for a continuation of this pattern.  The trend is clearly higher driven by an abundant supply of buyers, but we always need to watch for cracks and be prepared for the eventual top.  Stick with what is working but don’t become complacent.

Trading Plan:
The market is still above our trailing stop-loss at 1570 and we don’t need to do anything here.  Someone out of the market could use this weakness to get in while using 1570 as a stop.  If we break 1570, the trading range continues, but the rally is not at risk unless dip buyers cannot stop us from breaking the 50dma and 1540.

INDIVIDUAL STOCKS
AAPL is down with the market, but holding the 50dma.  It is okay to hold the stock here, but keep it on a short leash.  Failing to hold the 50dma shows a wider audience is unwilling to buy the rebound and the stock will likely stall again.  Defense is the most important part of sustainable trading and no matter what you think about AAPL, stay disciplined and stick to your trading plan.  That includes using a rigid stop.

AMZN’s bounce above the 200dma was short-lived and we are already back under.  Sometimes we get chased out of a position soon after placing it, but that doesn’t mean we should give up.  Risk management is what lets us survive our mistakes, but sometimes we are not wrong, just early.  Keep following a good idea and wait for the next entry point.  When a deeper pool of dip buyers failed to show up and support AMZN, it shows there is more downside left.  Don’t get greedy because this stock will move lower in waves.  Take short profits periodically and re-short the inevitable bounce.

FB daily at 1:25 EDT

FB daily at 1:25 EDT

Reader Request:  FB  is posting earnings after the close.  This stock gave investors a wild ride since the IPO.  One of the most widely anticipated IPOs was the biggest flop, but here we are nearly a year later and much of the hype has been wrung out of the stock and the irrational perma-bulls bailed out a long time ago.  At this point traders are no longer willing to buy the potential and are waiting for performance.  There are a lot of reports of FB user fatigue in the developed world and young people don’t want to be on the same social network as their parents, but FB tapped into the innate urge for humans to connect and the international potential is huge.  A lot of upside remains for the company  the challenge is if the stock will follow.  It already has a high valuation, but exceeding expectations tonight will go a long way getting traders excited about this stock again.  A strong surge tomorrow is buyable, but if FB disappoints stay away from it.

Leave other stock requests in the comments.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.